a U.S. firm holds an asset in Great Britain and facesthe following scenario: (13 points)State 1State 2State 3Probability 25%50%25%Spot rate$ 2.20$ 2.00$ 1.80 /£P*£ 3,000£ 2,500£ 2,000P$ 6,600$ 5,000$ 3,600=P* Pound sterling price of the asset held by the U.S.firm==P = Dollar price of the same asset1) Compute the expected value of P and S.2) What is the covariance of P and S?3) Identify the value of b in the regression of the formP = a + bxS+ e.4) How can this company perform an effective hedgeby using financial assets (e.g., forward contract)?

Analyzing the U.S. Firm's British AssetThis scenario provides a U.S. Firm protecting an asset in…

Answered: a U.S. firm holds an asset in Great…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Chinese company makes the decision to proceed with the US business, a U.S. auto company agrees to buy the Chinese company’s manufacturing plant and U.S. sales operations. Assume the following: The US company’s cost of equity is 10%, reflecting a risk free rate of 4% and a beta of 1.2. The cost of debt is 6% and the tax rate is 30%. D/E is 1. The expected RMB/$ will stay at 7 for the next five years. The US Company believes an appropriate adjustment for taking on the international risks is to increase its beta to 1.4. All cash flows will cease after the five years. In other words, the U.S. company is acquiring a five-year annuity of cash flows. Assume the US company will continue to pay taxes in China on the income, and will not have to pay any incremental U.S. taxes. What is the market risk premium? 5% 4% 6% 10% What is the expected return on the entire equity market? 6% 10% 9% 12% What is the Company’s after-tax cost of debt? 0% 8% 2% 10% What is the U.S.…
A Japanese firm has a contract to buy equipment from a US manufacturer for $2.20m in 30 days. The current spot rate is 110 JPY/USD. A. The Japanese firm has an asset/liability position in dollars. B. The Japanese firm faces the risk that the yen will appreciate/depreciate. C. How can the firm hedge this risk (be specific and detailed)?
Assume that Palm Company owns 100% of Wu Company which is located in China. Wu's functional currency is the U.S. dollar. On 1/1/X1, Wu Company acquired equipment for 100,000 yen when the exchange rate was $1.2 per yen. During year X1, Wu has recorded S-L depreciation of 10,000 yen based on a 10-year life. The 12/31/X1 exchange rate is $1.4 and the average exchange rate for the year was $1.3. Based on this information, Wu's depreciation expense should be reported at which of the following amounts on 12/31/X1?
Max Ltd sells equipment to Star Ltd, a U.S. company on 30/01/2020 for US$250,000. Goods are invoiced in US dollars. Payment is made on 5/03/2020. The company also buys parts from the USA, also invoiced in US$, value US$187,500 on 20/4/2020. The functional currency of Max Ltd is AUD$. As at 30/06/2020, this debt unpaid. Rates: 30/01 – A$1 = US$0.93 5/03 – A$1 = US$0.92 20/4 – A$1 = US$0.94 30/6 – A$1 = US$0.91 Required: SHOW YOUR WORKINGS Prepare journal entries for the above transactions. (Round answers to the nearest dollar, e.g. $200,263.57 = $200,264).
In 20X2, Canterra Company invested $2,600,000 CDN (800,000FC) to establish a foreign subsidiary, Forterra Ltd. Forterra took out a $320,000FC bank loan to help finance the purchase of equipment and furniture. At the time the loan was taken out, the exchange rate was 1FC = $3.40 CDN. The loan principal is not required to be repaid for five years. Forterra purchased equipment costing 960,000FC when the exchange was 1FC = $3.30 CDN. Forterra had a very successful first year of operations and decided to purchase a tract of land for 320,000FC. The exchange rate at the time of purchase was 1FC = $2.90 CDN. Forterra's policy is to declare and pay dividends at its year-end. Both Canterra and Forterra have December 31 year-ends. Forterra has provided the following information: Requested a. Calculate Forterra's cumulative translation gain/loss for 20X3 using the presentation currency method.
You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 4% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP Let's suppose you signed the Currency Options Contract. The actual exchange rate at the time of the payment is 1.60 $/BP. What would you do? Group Answer Choices Exercise the option and take 1.54 $/BP. Do not exercise the option and take the actual exchange rate of 1.60 $/BP.
You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 4% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP What are the costs of MMI? (Answer in US$ of course. You are US company!) Group of answer choices None of the above $789,343 $735,504 $770,082 $783,452
You are US company, 500,000 BP (British Pound) payable to UK in one year. Answer in terms of US$. Information for Forward Contract: Forward exchange rate (one yr): 1.54 $/BP Information for Money Market Instruments (MMI): Current exchange rate: 1.50 $/BP Investment return at Aerion Fund Management (in UK): 6% annual Interest rate of borrowing from Bank of America (in USA): 2% annual Information you need for Currency Options Contract: Options premium: 0.015 $/BP Interest rate of borrowing from Bank of America (USA): 2% annual Allowed to exercise options at 1.54 $/BP What are the costs of MMI? (Answer in US$ of course. You are US company!)
A U.S. firm has total assets valued at €827,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was €.9473/$. Today, the exchange rate is €.8997/$. By what amount did these assets change in value on the firm's U.S. financial statements? Multiple Choice −$46,187.79 −$39,365.20 $39,365.20 $46,187.79 $0
12. U.S. Multinational Corporation’s subsidiary in Bangkok has on its books fixed assets valued at 235000 baht. One-third of assets were acquired two year ago when the exchange rate was THB 37=$1. The other fixed assets were acquired last year when the exchange rate was THB 38= $1. Each layer of fixed assets is being deprecated straight-line with an estimated useful life of 20 year. Relevant exchange rates for the current year are Year-end rate THB 34=$1 Average rate THB 37=$1Calculate the Thai subsidiary’s depreciation for the current year, assuming the U.S. dollars is the functional currency.
ASAP If answer is correct I'll give you Upvote. Caculation: A company exports commodity X to Canada, if the total purchase price(including VAT 17%) is RMB 247500, the rate of expense standard is 5%, the rate of export tax rebate is 14%, the total freight is USD245.00, the company insures against all risks for 110% of invoice value, the premium rate is 1.5%, the profit is 10% based on purchase price. Rate of foreign exchange: USD1.00=RMB6.50 what are FOB price, CFR price and CIF price respectively?
7. U.S. Multinational Corporation’s subsidiary in Bangkok has on its books fixed assets valued at 408000 baht. One-third of assets were acquired two year ago when the exchange rate was THB 32=$1. The other fixed assets were acquired last year when the exchange rate was THB 32= $1. Each layer of fixed assets is being deprecated straight-line with an estimated useful life of 20 year. Relevant exchange rates for the current year are Year-end rate THB 32=$1 Average rate THB 36=$1Calculate the Thai subsidiary’s depreciation for the current year, assuming the baht is the functional currency.

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